During last year’s COP28 summit in Dubai, African political and financial leaders spoke extensively about how important financing will be in ensuring that Africa’s future is a climate-resilient one. One of the more ambitious proposals for ensuring that this
financing plays the role it should, came from Wale Shonibare, director for energy, financial solutions, policy, and regulation at the African Development Bank. In a speech at an event on the sidelines of the summit, he called for a new, climate-centric financial
architecture for the continent.
The proposal, which Shonibare calls a “moonshot” idea for transforming Africa’s financial landscape includes, among other things, a bank of settlements and a new currency backed by commodity reserves, including oil.
While there will be hesitancy about parts of this proposed architecture, it does have serious merit. To have any hope of achieving its ambitions, however, it will need support from a broad range of public and private sector players, including Africa’s vibrant
fintech sector.
Short-changed by the status quo
At the heart of Shonibare’s call for a new financial architecture is a frustration shared by many people and institutions across Africa - not enough has been done to ensure Africa’s climate resilience.
That’s even though Africa is already disproportionately affected by climate change. According to the
World Meteorological Organisation (WMO), more than 110 million Africans were adversely affected by climate change in 2022, with more than US$8.5 billion in damages from climate events.
If Africa had contributed an equal, or even proportional, share of the emissions that contributed to those damages, people on the continent might feel more inclined to believe that it should shoulder most of the weight when it comes to financing climate
resilience. But it hasn’t. Even today, Africa contributes
just 4% of global emissions.
It’s also worth noting that some of the climate standards being implemented by developed nations could also have a negative impact on growth and development across the continent. The European Union’s Carbon Border Tax Adjustment Mechanism, for instance,
would significantly constrain Africa’s ability to export value-added products such as cement, iron, steel, aluminium, and fertilisers to Europe.
Given how important a trading partner Europe is for Africa, the effects of the mechanism could be potentially devastating. Without the ability to export refined products, African countries would be forced to export raw commodities to Europe, resulting in
de-industrialisation and job losses.
Enabling internal growth
It is a small wonder then that, even as African countries continue to push for external climate funding, they are also increasingly looking internally for growth and development. Fortunately, using intra-African trade for these purposes is becoming increasingly
viable.
In 2021, trading began under the African Continental Free Trade Agreement (AfCFTA). With all but one African country a signatory to the agreement, the free trade bloc it creates could fundamentally change Africa’s future for the better. According to the
United Nations Conference on Trade and Development (UNCTAD), it could
boost intra-African trade by 33% and cut the continent’s trade deficit by 51%. However, free trade agreements like AfCTFA will not be enough on their own to ensure that Africa meets its full economic potential.
Make no mistake, that potential is significant too. Africa is, after all, distinct from many other regions around the world because its overall population is still seeing significant growth. In fact, by 2050, the continent is expected to be home to
2.4 billion people. Its population is also, on average, very young, with
70% of Africans under the age of 30. The continent is additionally experiencing growing levels of connectivity and education. Taken together, those equal many of the necessary ingredients for the kind of innovation-led economic boom that will allow Africa
to invest heavily in renewable energy and other forms of climate resilience.
That can only happen if money is allowed to move freely, and right now, it isn’t. Thanks to complex regulatory regimes and over-zealous exchange controls, transferring money between African countries can be a frustrating, time-consuming, and expensive exercise.
The impact this complexity has on intra-African trade should be obvious.
Fortunately, it doesn’t have to be that way. Initiatives like the
Pan-African Payment and Settlement System (PAPSS), which enables instant, secure Pan-African payments and aims to simplify many of the historical costs and complexities associated with them, show what’s possible when bodies from across the continent come
together to solve a problem.
Bringing fintechs into the fold
If the financial architecture outlined at COP28 is to become a reality and build on initiatives outlined above, then the continent’s fintechs have to be involved in its conceptualisation and execution.
For many millions of Africans (45% of whom don’t have access to a formal bank account) fintech products have been vital to providing the kinds
of financial services that people in other markets have long taken for granted. They allow people outside of formal banking structures to pay for goods, services, and subscriptions. They facilitate people to take out insurance and access small business loans,
among other things. These are all vital to fuelling the growth and development that will be so important to Africa’s climate and financial future.
Regardless of what a climate-centric financial architecture for Africa looks like, fintechs will be vital to making it a reality. More than most other players on the continent, they have the intellectual capital and skill sets required to ensure that Africa
and its people achieve their development goals while also building up climate resilience.